6.1 Conclusions
In this report an analysis has been made on the competitive position of the EU GMES downstream sector. More specifically, the analysis addresses those European
organisations that offer value added services based on EO data. No further breakdown has been made yet of which organisations use EO data the provision and availability of which would be affected by the introduction of GMES services.
Performance of the sector
The EO downstream sector is relatively small in terms of revenues, and strongly
dependent on grants. The revenue per employee is also modest. The organisations in the sector generally make profit, also the smaller ones, however these profits are very volatile. These are all typical indications for a sector that is developing.
The EO downstream sector focuses to a large extent on national markets, and to a minor extent on intra-European sales. Export to markets outside Europe is limited, and only done by some larger companies. There are no indications of significant imports from outside Europe of EO value adding services.
Structure of the sector
The sector consists of a large number of small and medium sized companies, and a few larger companies, which are almost all located in the EU15. Labour is an important factors, as well as data. EO value adders are highly dependent from their data suppliers. Many value adders have a framework contract that is managed by the supplier. A large share of EO value adding companies consider the supplier performance to have a negative impact on their own performance.
The customers of the EO downstream sector are to a large extent public
authorities/agencies. Private customers are limited, as commercial business takeoff is considered to be slow. Barriers to enter the private market are in the relatively high cost of data and the lack of knowledge about the EO potential to tentative customers. There are a few barriers to entry: government policy and data provision costs.
Governments have a strong influence on the market when deciding whether or not to use EO products or services for their policies. New entrants have a comparative disadvantage compared to the larger incumbents, as these generally have their own data and are thus not dependent on external data providers.
Processes
There is a large degree of customisation of the products and services offered by EO value adders. Around 70% of products and services are highly customised, while approximately 8% are not customised at all, i.e. are fully standardised. Future products and services are anticipated to have a lesser degree of customisation.
Companies are keeping the production of products and services inhouse, there is limited outsourcing. The extent of process automation is limited and manual processes raise constraints in terms of staff availability and expertise, especially in small firms. The EO downstream sector shows a relatively high investment in R&D, which amounts to more than a quarter of revenues. However, many of the R&D funds originate from public funding/grants, and not from own investment. Smaller companies spend a smaller portion of their revenues on R&D than large ones.
Regulations and Framework conditions
Regulatory and framework conditions influence the development of the EO downstream sector. Our analysis has shown that the public sector has an important influence on the sector, not only because it sets the legal and regulatory framework for the sector, but also because it has a large influence as a client, by funding the development of the sector and by shaping policies that influence market demand for EO services. The competitiveness of the EO downstream sector thus is very depending on the influence of the public sector. Other important issues are the input factors labour and data, and R&D in supplying sectors. The EO sector requires highly skilled employees, a demand that also other industries have. At the same time supply of these employees decreases. This means that a possible reduced influx of new well-skilled employees is a potential threat for the sector. In terms of data input, this has been proven to be a major concern for service providers. They indicate that the costs are increasing, which could hamper profitability and innovation.
The European EO downstream sector compared with the US
The US Downstream sector is between two and three times the size of its European equivalent, depending on the exact definition of the sector. The revenue per employee is approximately 20% higher in the US than in Europe. The US downstream sector appears to be growing faster than that in Europe. The size distribution in the US is similar in character, but in absolute terms there are more large companies in the US.
There are similar market profiles in terms of applications. The main difference is the much larger domestic defence / security market accessible to US companies. There is no direct evidence of any clear differences in export performance / market access between the US and Europe. Surveys on both continents reveal almost identical perception that other countries’ industry enjoys better protection in their domestic markets. The investment capacity is similarly limited within most companies. There is significant dependence on public sector investment in R&D in both the US and Europe. In terms of service provision, the NOAA is as a public institution strictly forbidden to offer services that can be offered by private companies, which implies a significant market opportunity for private service providers.
6.2 Recommendations
The terms of reference request to provide recommendations on three issues:
1. How to optimise the involvement of the business community, with particular reference to SME and to companies outside 'traditional' sectors such as space or remote sensing;
2. How to optimise framework conditions for stimulating DS industry's investment in Europe;
3. How to best mobilise EU policies and funds (including industrial policy, regional funds etc.) to stimulate DS market growth.
We will address these issues in the next subparagraphs. Additionally, we will discuss further industry monitoring.
6.2.1 Optimising the involvement of the business community Minimising uncertainty
One of the most important factors affecting business investment decisions is risk. Uncertainty over conditions of access, price and data policy for GMES data and core service outputs mitigates against investment in new services to use them. Uncertainty over future scope changes of core services (and potential future competition from them) will also mitigate against investment.
Therefore, as important as the policy itself, is the need to communicate clearly to industry on what the scope of the Core Services will be, what the limits of their growth will be, and under what terms will access be allowed their outputs to different stakeholders Preserve opportunities downstream
If the core services grew greatly in scope and mat a large number of end users needs, then this would clearly damage the commercial market for the downstream industry. Generally speaking, restricting the scope of the core services (so that they don’t go too far
downstream) will increase market prospects for downstream service providers. However, the optimum scope for a core service from an economic perspective will be different for each service. Furthermore, the overall economic optimum may well not coincide with the optimum from the perspective of:
• Core service suppliers
• Downstream industry
• End users
• Funders
It is therefore recommended that the value chain of each CS is studied in detail to determine the optimum scope. This will require the development of a number of
scenarios for each core service under which the costs and benefits of different scopes can be examined. It will require trade-off between the interests of the different stakeholders in order to recommend an optimal scope for each service. Annex A provides more detail on this.
Attracting industry involvement
While most of the EO industry is very well aware of GMES, there may be other companies in the wider geospatial industry, or service companies in industry facing segments (e.g. private end users such as from oil an gas) or non-EO using companies for which EO could become an important input factor who are not so aware. Two
approaches could be taken to widening participation:
i) Publicity and information direct to other industry segments. This could be supported by the results of previous studies, for example those undertaken in the ESA EOMD programme;
ii) Incentivising bidders into EC R&D programmes to include such companies in their teams. This could be done by making it clear that the evaluation of the proposals will reward those with a clear business plan, including a route to market, such as would be provided by including companies closer to the end-user in the team.
iii) Assessment of a further development of the industry association and subsequent stronger involvement in the programme.
6.2.2 Optimising framework conditions Securing the supply of qualified labour
The analysis of framework conditions showed that securing the supply of skilled personnel is key for the further development of the sector. Next to data, well-educated professionals are crucial in the development of new services in EO. The current profile of employees indicates that these are academic (masters level or above) 30-39 year old males. The current greying of the European society, the diminished interest in science, engineering and technology careers and competition from other sectors looking for the same personnel could result in difficulties for the EO services sector. It is therefore recommended to develop together with the sector a strategy to secure the supply of skilled employees in future. One could consider connecting the EO downstream sector explicitly to ongoing initiatives in this area, such as the implementation of
recommendations from the High Level Group on Science Education77 and ESA’s European Space Education Resource Office project78.
Export promotion support
The analysis has shown that there are limited trade barriers for European EO downstream companies to export their services outside Europe. In practice, it has shown that the large companies export outside Europe, while the small companies generally serve the
domestic market only. These indicated that limited resources for sales activities and the geographical footprint mainly prevent the SMEs in the EO downstream sector from accessing export markets. It is therefore recommended to assess with the industry association and the member states whether export promotion support can be set-up. National space agencies in co-operation with national export promotion agencies can facilitate the export development process with dedicated measures and facilities.
77
http://ec.europa.eu/research/science-society/index.cfm?fuseaction=public.topic&id=1100 78
6.2.3 Mobilising EU policies and funds Structuring of development projects
Industry studies (Vega 2008) have noted the time taken for development of new EO services. It is also evident that industry itself, being composed of many small companies, lacks the capacity to invest heavily in these services. Furthermore, the type of R&D support that is needed changes during the course of the development.
It may be noted that the many R&D support programmes , including the ESA GMES Services Element and both SBRI and STTR in the USA, follow a phased approach. However the FP7 mechanisms used so for to develop downstream services does not. It is recognised that there are some constraints imposed top-down from FP7, but the following changes would make the programme more suitable for EO service development.
i) Explicitly recognised a phased approach, with small Phase I projects (12-18 months for initial concept design, customer testing and business model development) leading to larger phase (24-36 months for development and roll-out). As in SBRI, there should be an expectation that a significant number (ca. 50%) of Phase I projects would continue to Phase II. This second competition will focus the quality of Phase I projects, while still giving bidders an incentive that if the project performs well there would be a significant chance of continuation.
ii) New EO data and techniques develop quite quickly. In order to take advantage of these developments it would be desirable to reduce dramatically the time needed from initial call to project start for Phase I projects. At present this period is 18 months or more for FP7 integrated projects. The target should be 6 months (One months notice pre- call, two months for bid submission, two months for evaluation, one month for
negotiation).
Examine policy interventions encouraging use of GMES services
One way to create or stimulate a market is through the policy interventions that encourage or mandate the use of certain technologies – in this case for environmental monitoring. However this approach would need to be adopted with extreme caution to ensure that the benefits to one industry (EO) did not result in additional costs and regulatory burdens to another industry (that is responsible for complying with the regulations), and to prevent discrimination of technologies. The US comparison shows that the security and defence aspect is important in this respect as well.
6.2.4 Further industry monitoring
For the quantitative aspects of this study, the authors have drawn from two previous studies, by Euroconsult and Vega, both commissioned by ESA. Although the VEGA study was a follow up from an earlier version from 2004, these studies are not considered to be structural industry monitors. These studies cover statistics like revenues and
The services sectors in general have problems with trade statistics. This is due to the fact that services can be traded in four ways ("modes of supply"), because often proximity between the service provider and client is required:
1) cross-border (e.g. internet)
2) by movement of the consumer (e.g. tourism)
3) by commercial presence (Foreign Direct Investment) 4) by movement of the service provider (temporary migration)
For goods, trade statistics are collected at the border (goods trade only considers mode 1), but as services mostly do not visibly cross these borders, it is much more difficult to collect data on services trade. Even for more commonly traded services like management consultancy, data are lacking.
An additional problem with the EO downstream sector is that this is not a separate statistical category, which will probably limit the attention for the sector of statistical data collectors (National Statistical Offices). Given the size of the EO downstream sector, this is only likely to change if policy makers make this an explicit priority.
It is therefore recommended to develop a sector monitor that enables to assess the development of the sector in terms of performance and trade. It is also recommended to start this monitor when a policy option for GMES has been adopted. After all, the Commission’s policy programming cycle requires further monitoring, and a sector monitor would give the right input for this. It should be realised that such monitor would need to cover both the companies in the sector (production, employment, export etc) and the customers (import, cross check on production).
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